What in the heck did I tell you about Quit Claim Deeds? Remember, a Quit Claim Deed conveys all interest in a property IF ANY. How much interest do you have in your rental property if you file Chapter 7 Bankruptcy?
Question 1: When you file Chapter 7 Bankruptcy, you keep ownership of all your property until the bankruptcy is complete—true or false?
False. And if you answer true, please take a hammer, set hand on table, and bring hammer down with such velocity in order to cause great pain.
Question 2: True or false: When you file bankruptcy and the trustee assumes your position as owner of all your property*, there’s a document recorded in the public records so that everyone else knows that your trustee has now taken ownership of your property?
False! If you answer true, please see above.
Trick Question: What’s the difference between a Quit Claim Deed and a Quick Claim Deed?
Straight Answer: No such thing as a ‘Quick’ Claim Deed, no matter how fast you write it.
‘Adam’ and ‘Kyla’ (so we’ll call them) were two people who bought different properties. These are real stories that happened in Northeast Florida, but had two very different outcomes.
Adam bought a piece of real estate from Tom. He paid cash for the property and Tom, the seller, conveyed his interest using a Quit Claim Deed. It was a fast transaction and Tom was easy to deal with, so why drive up the cost by getting a title insurance policy? Adam handed him the cashier’s check and Tom signed the Quit Claim Deed. Adam was no fool, he knew he had to record the deed, so he took it down to the courthouse and had it recorded. Wow, Adam just saved a lot of money by doing it all himself…so he thought….
Adam fixed up the place and tried to sell it, but guess what? Tom was in bankruptcy when he sold the property to Adam. Tom had sold all interest he had in the property IF ANY, and it turns out Tom didn’t have any interest in the property. Because of the bankruptcy, the trustee was the owner, not Tom.
Adam had paid for the property, put money into fixing it up, and now he was going to have to hire an attorney to straighten out this mess so he could get some return on his investment. Have you ever dealt with a bankruptcy trustee whose job is to protect the interest of the creditors? I promise it’ll take more than a smile or a lot of tears to get the bankruptcy trustee just to back down. Adam had bought the property from Tom using a Quit Claim Deed, which provides NO WARRANTIES. Does Tom really have any liabilities to Adam? That’s a question for a judge to decide, and Adam’s going to get the privilege of paying all the court cost to have a judge think about it.
Kyla had a similar experience with a much different outcome. She bought a fixer-upper that she was going to turn around and sell. But Kyla was smart enough to buy title insurance. Maybe she had read my blog, or maybe she was just well informed, and maybe she believed that you make your own fortune (or at least you can protect it!). Title insurance costs a low, one-time fee to protect your ownership interest into the future from all the title flaws of the past, and it automatically calls for a title search. Kyla’s title search was done—came back clean—closing was done, seller signed a Warranty Deed and the seller got their money. Kyla left the closing table, went to Home Depot, and got busy with renovations.
Now Kyla had a mess on her hands: the day before her closing, her little desperate sellers had filed bankruptcy. Same situation—different outcome. The title search had come back clean because when the bankruptcy trustee assumed the ownership position, there was no recorded document in public records that placed all on notice of the bankruptcy. Yet because Kyla had title insurance, this problem was not something she’d have to pay for out of pocket. So when the trustee of the bankruptcy demanded the property, Kyla called her title insurance company and her title insurance policy kicked into action.
Like Adam, Kyla had paid for the property and paid to fix it up, but unlike Adam, the bucks stopped there. With no additional cost to Kyla regarding ownership issues, her Title Insurance took care of the legal fees to sort out the matter (and actually had to pay a lump sum to the bankruptcy trustee). It was not Kyla’s job to go back to the seller to work it out—it was the title insurance company’s. Kyla could focus on the condition of her home—not the condition of her ownership.
Title Insurance can make a big difference in real estate and real money.
This is Story # 453 of 1001 Reasons Why to get Title Insurance.
*Homestead property is excluded. However, there’s a process for that to take place. J